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Netflix Optimists Predict a Climb by Week's End

Speculators scoop up NFLX's weekly calls

by 12/12/2012 1:48 PM
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Netflix, Inc. (NASDAQ:NFLX - 91.60) has climbed about 6.4% today, after Morgan Stanley lifted its price target to $105 from $80 ahead of the open. As a result, the equity has been besieged by bullish speculators, with roughly 50,000 calls crossing the tape so far -- more than double the norm. By comparison, just about 25,000 puts have been exchanged.

Leading the pack has been the weekly 90 call, which has seen around 6,800 contracts change hands at a volume-weighted average price (VWAP) of $1.98. About half of these calls traded at the ask price, suggesting they were bought. Since today's volume exceeds current open interest levels -- coupled with the fact that implied volatility has jumped 10.8 percentage points during the course of the session -- it can be assumed that new bullish bets are being placed here. By purchasing these calls to open, traders are betting on the stock to rise north of breakeven at $91.98 (strike price plus the VWAP) by expiration this Friday.

NFLX has been an overachiever on the charts lately, boasting a year-to-date advance of about 32%, as well as a year-over-year gain of roughly 23%. The shares have also bested the broader S&P 500 Index (SPX) by about 46 percentage points during the past 60 sessions. What's more, the stock is on pace to finish a second consecutive week atop its 60-week moving average, a feat not accomplished since September 2011.

Despite this technical prowess, there are still a number of holdouts in NFLX's bearish camp. Although short interest on the equity declined by 15.7% during the last two reporting periods, these bearish bets still account for a hefty 30% of the equity's available float. In fact, it would take nearly seven days to cover these shorted shares, at the stock's average daily trading volume. Should the remaining shorts abandon their pessimistic positions in the near term, the security could reap the benefits of a short-covering rally.

Meanwhile, the vast majority of analysts covering the equity appear to have little faith in NFLX's prospects. Only three have deemed the stock worthy of a "strong buy" recommendation, compared to 17 "holds" and nine "sell" or worse suggestions. Even more telling, the security's average 12-month price target sits at a paltry $66.62, representing a steep discount to its current price of $91.60. This leaves the door wide open for future upgrades and/or price-target hikes, which could push the stock even higher.


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